Headlines

Mickey Kaus

Stay angry, Paul Krugman

So why is President Obama a “wimp,” according to Krugman, if he starts putting in place the necessary adjustments now? Because Krugman wants to erase the future deficit entirely with tax increases? No–he’s said it would take a combination of “death panels and sales taxes.” … “Death panels” was a joking reference to various methods of cutting health care costs. But is it so clear that those methods, at their semi-rationy margin, are preferable to other methods of cost-cutting–like means testing? Let’s pull the plug on granny so the Kochs can keep getting Medicare benefits? Or pay for Medicare with a regressive VAT?

Is Obama a “wimp” to consider other methods? Or does Krugman just need to stay angry? Open the door to shaving the CPI adjustment and you’re a spineless conceder who’s imposing “a lot of hardship.” But a 5% sales tax–no hardship at all!

Blowback

Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.

I often disagree with Paul Krugman, but I usually understand him. Lately, however, I have been puzzled about his view of the bond market. In a recent post, he takes President Obama to task for believing that the failure to deal with our long-term fiscal imbalance might cause a spike in interest rates:

America can’t run out of cash (except politically, if Congress refuses to raise the debt ceiling); it basically can’t experience an interest rate spike unless people see an increased chance of economic recovery and hence a rise in short-term rates. And the people who have been predicting an interest rate spike any day now for four years shouldn’t have any credibility at this point.

But back in 2003, when the fiscal imbalance was much smaller (it was $377.6 billion – RWM), he wrote:

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits….

How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that ”a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.

I am having trouble reconciling these points of views. Has Paul changed his mind since 2003 about how the bond market works? Or are circumstances different now? If anything, I would have thought that the fiscal situation is more dire now and so the logic from 2003 would apply with more force. I am puzzled.

Professor Mankiw asks:

Or are circumstances different now?

Yes, “the one that we’ve been waiting for” is now in the White House…so, it’s all good.